After Vietnam’s economy performed slightly below expectations in 2016, the Asian Development Bank (ADB) forecasts it will increase modestly this year, with growth of 6.5 per cent followed by a further strengthening to 6.7 per cent in 2018.

“Over this period, growth will be driven by continued high foreign direct investment, rising domestic consumption and demand, and an expected modest recovery in both agriculture and mining,” Mr. Eric Sidgwick, ADB Country Director for Vietnam, told the “Asian Development Outlook 2017: Transcending the Middle-income Challenge” conference held in Hanoi on April 10.

ADB forecasts inflation of 4 per cent this year and 5 per cent next. An expected rise in global food and fuel prices, higher interest rates in the US, and a stronger US dollar will add to imported inflation. Another likely source of inflation is the continued implementation of the government’s road map on administered prices for education, health, electricity and water, as well as minimum wages.

Higher growth and inflation is therefore set to cause the current account surplus to narrow. Merchandise exports will rise by an annual 10 per cent over the next two years as new foreign-invested factories begin producing and new trade agreements take effect.

Growth in services, strong in 2016, is projected to remain so in 2017 and 2018, with tourist arrivals further boosted by the new e-marketing campaign launched by the government recently.

Vietnam continues to ride a wave of foreign direct investment (FDI), which reached a record in 2016 and with new commitments suggesting that disbursements are likely to continue upwards in 2017 and 2018. During the first quarter, disbursements were $3.6 billion, up 3.4 per cent year-on-year.

Construction will continue to benefit from high FDI disbursements setting up new factories, a strengthening housing sector, and continued high public investment in transport and energy. Manufacturing will also be boosted by the continued opening of new foreign-invested factories. Imports are likely to rise even faster as larger FDI inflows draw in additional imports of capital goods and manufacturing inputs. The current account surplus is expected to moderate to 2 per cent of GDP this year and 2.5 per cent in 2018, according to the ADB.

Prospects for private investment seem bright. Reform to business practices has helped move Vietnam up in the World Bank’s Doing Business rankings from 91 among 189 countries surveyed in 2016 to 82 among 190 in 2017. Ongoing reforms to allow greater foreign ownership of domestic stocks and State-owned enterprises along with reforms to facilitate private participation in building infrastructure should encourage private investment.

The number of newly-established enterprises hit a record high of 110,000 in 2016, up 16.2 per cent against 2015. The Nikkei Purchasing Managers’ Index, which measures expectations for business inventories, reached a record high in February, with a particularly sharp rise in new orders to manufacturers. Vietnam is also expected to benefit from the implementation of the European Union - Vietnam Free Trade Agreement (EVFTA) in 2018, which will create many new business and trade opportunities.

Public debt pressures have prompted the government to set ambitious targets for the budget deficit, reining it in to 3.5 per cent of GDP this year and holding it at about 4 per next year, according to the ADB. Most of the reduction in the fiscal deficit would, however, be due to higher receipts from the sale of equity in State-owned enterprises (SOEs), which the government treats as revenue. Excluding those receipts, fiscal deficit reduction will be much more modest.

On the expenditure side, the government plans to cut recurrent expenditure by 6 per cent while raising capital expenditure by 36 per cent. Achieving fiscal consolidation over the medium term will be challenging and require deeper tax reform, better revenue administration, and much more efficient public expenditure.

Caution is needed, ADB believes. Despite booming industry and service sectors, overall GDP growth remains below 7 per cent per annum. “Vietnam will not reach upper-middle income status until around 2031 at current growth rates,” Mr. Aaron Batten, ADB’s Country Economist for Vietnam, told the conference. “Lifting growth by 2 per cent would accelerate that to 2026. Sound policies, therefore, are the priority for the government in sustainably lifting long-term GDP growth back above 7 per cent.”